On 24 March 2016 HMRC published a summary of responses to the call for evidence on cash, tax evasion and the hidden economy. The call for evidence had asked for views on the relative decline in the use of cash and its impact on tax compliance, the hidden economy and money laundering. HMRC received eighteen written responses and held meetings with some respondents.

Future of cash

The call for evidence had pointed out that according to a Payment UK report 1.6 million people in the UK rely predominantly on cash. A respondent suggested that 78% of these are aged 45 or more and that the figure represented 3.1% of UK adults. Evidence supplied by respondents suggested that there are almost two million individuals in the UK who never interact with the banking system. Also, half the individuals who have basic bank accounts still choose to manage their money in cash.

Respondents also suggested that people on low incomes or people in other vulnerable groups within UK society are more likely to rely on cash. The Payments UK report quoted in the original consultation document also suggested that 40% of consumers that rely on cash have total household income of less than GBP 10,000 per annum. Cash is useful as a budgeting tool for these groups of people.

Cash is also the dominant payment method in the convenience retail sector where despite the increasing use of contactless payments cash is still dominant owing to the small total spends and frequent visits by consumers. Respondents provided evidence suggesting that 81% of consumers in the convenience retail sector pay in cash.

Cash is likely to remain an important payment method for millions of people in the UK. In future no single alternative payment method will dominate and cash will be a popular option among the range of alternatives. The trend away from cash may however be influenced by further innovation in payment methods. Smart phone payment methods are an increasingly popular cash alternative especially for low value payments. Migration to debit cards and increasing awareness of contactless payment methods would also be an important factor in the trend away from cash. Some respondents suggested that security and privacy concerns could move consumers and businesses more towards cash.

Tax compliance and the hidden economy

Cash is seen as the main enabler of the hidden economy as it can be used to conceal, suppress or understate income. The extent to which tax facilitates non-compliance is difficult to estimate. One respondent suggested that cash contributes to non-deliberate mistakes in compliance by making it more difficult for businesses and individuals to keep contemporaneous records.

Several respondents suggested that the trend away from cash would benefit HMRC’s compliance activities. The larger digital footprint often created by cash alternatives such as debit and credit cards could reduce chances for deliberate tax evasion and enable improved targeting and greater efficiency by HMRC. This would also mean improved relationships with compliant businesses as it would reduce unnecessary contact with HMRC.

However people intent on tax evasion are unlikely to choose a payment method with an audit trail. Some digital payment methods or alternative currencies provide a less distinct audit trail than cash and that audit trail could be amended, deleted or invisible.

The tax authority therefore needs to keep up to date with the changing payment methods and ensure its approaches are robust enough to deal with the threats emerging. Some respondents were concerned that resource constraints could affect the ability to deal with non-compliance and that certain tools such as comparisons of lifestyle to income levels should be important in tackling the hidden economy.

Money laundering

Cash is attractive for money launderers as it is untraceable, readily exchangeable and anonymous. Several mentioned a recent Europol report suggesting that cash is important for breaking digital audit trails and is therefore used as a facilitator for money laundering. A future decline in the use of cash means that cash will stand out more and help investigators but cash will continue to be used to launder proceeds of crime in addition to digital methods or alternative currencies. HMRC therefore needs to be aware of these developments.

Criminal activity makes use of a range of methods for moving cash including cash rich businesses such as scrap metal wholesalers, nail bars, high value dealers, gambling businesses and takeaways. Money Service Businesses can be used to send funds overseas or convert them into high denomination notes.

Respondents pointed out that in some countries limits are imposed on cash payments between consumers and traders, examples being France, Spain and Italy. Currency modernization would provide an opportunity to reset cash levels and reduce the amounts hoarded or held in the hidden economy. International cooperation and data sharing including exchange of information agreements are already influencing the way in which money is laundered.